Save Article

Waste Management Shares Fall
By 20% Amid CEO's Departure

By

Jeff Bailey and

Joann S. Lublin Staff Reporters of The Wall Street Journal

Updated Oct. 31, 1997 12:01 a.m. ET

Waste Management Inc.'s
shares plunged 20% in the wake of the abrupt departure of its chief executive officer and the disclosure by the trash hauler that adoption of less-aggressive accounting would depress future profit.

Investors dumped the stock heavily at the opening of the New York Stock Exchange, the first trading after the CEO resignation was announced late Wednesday. And then bearish comments about Waste Management's prospects from Robert S. Miller, who on Wednesday was named interim chairman and CEO, further pushed down the stock.

Shares of the Oak Brook, Ill.-based company closed at $23.25, down $5.75, on volume of 35.8 million shares in composite trading on the New York Stock Exchange. With about 455 million shares outstanding, the plunge wiped out about $2.6 billion in market value.

Moody's Investors Service lowered its rating on about $7.7 billion of Waste Management debt securities. And it said the company's rating would remain under review for possible further downgrade because of "weakened operating performance," the use of cash to repurchase stock, which reduces financial flexibility, and uncertainty caused by the management turmoil.

The episode, which follows turmoil at
AT&T Corp.
in the past year after it named a top executive from outside the telecommunications field, illustrates the perils of hiring a CEO from an entirely different industry. It also leaves Waste Management's future in question.

Lavish Compensation Package

Ronald T. LeMay, a longtime
Sprint Corp.
executive, had left his telecommunications post in July for the top job at the nation's leading trash handler, accepting a lavish compensation package. Wednesday night Mr. LeMay quit and immediately rejoined Sprint in his former posts as president and chief operating officer.

The company simultaneously announced the departure of its chief financial officer, John D. Sanford, and of an executive vice president, James E. Koenig, who had been chief financial officer until he was succeeded by Mr. Sanford in February. None of the three departed executives could be reached for comment.

"We believe historical numbers are unreliable and are being reaudited," Mari Bari, a waste-industry analyst at Deutsche Morgan Grenfell Inc. in New York, told clients in an early morning bulletin.

Mr. Miller, the interim CEO and a former
Chrysler Corp.
vice chairman, disputed that notion, saying in an interview that there will be no restatement of prior periods' results. "It's very different than what's being insinuated," Mr. Miller said. "That he must have found something terrifying under the covers. That isn't the case."

But Mr. Miller did prepare investors for bad news. Mr. LeMay had disclosed earlier in October a possible big fourth-quarter charge to write down the value of some assets. Mr. Miller said the charge would involve "some pretty big numbers hitting the books," and that adoption of less aggressive accounting standards would lead to lower earnings going forward.

'Not a Train Wreck'

"This is not a train wreck," Mr. Miller said. "This is a change in the philosophy of reporting. It's going to be a lot more conservative going forward." He said last year's reported results weren't improperly stated.

The company will likely reduce the number of years over which it amortizes the cost of assets such as garbage dumps, trucks and other equipment. That increases each year's cost, and cuts profit, though cash flow isn't affected.

In setting aside reserves for environmental liabilities, Waste Management, estimating a range of future costs, has also been in the practice of setting aside the minimum amount within the range. At Dec. 31, 1996, the difference between the minimum and maximum of its estimates was $180 million. And it discounts the size of those future costs, estimated at about $1 billion, thus reducing future expected reserves by $160 million. Both practices are within generally accepted accounting practices.

During his brief tenure, it became clear that a Waste Management turnaround would be slower in coming, making Mr. LeMay's huge stock and stock-option positions in the company less attractive.

Meanwhile, in recent weeks, as the
MCI Communications Corp.
takeover battle heated up, the phone business looked more dynamic than ever.

"I just think he saw enormous opportunity there," Mr. Miller said of Mr. LeMay. "He loved Kansas City and the phone business a lot more than he loved Chicago and the trash business." Mr. LeMay had kept his Kansas City house and was staying in a hotel suite in Chicago.

Embarrassment for Board

Mr. Miller, who has done turnaround stints at
Federal Mogul Corp.
and
Morrison Knudsen Corp.
, called Mr. LeMay "a terrific executive," but added that Waste Management's board was embarrassed by the abrupt departure. Mr. Miller said that leaves him to answer the question, "How could we have paid so much to get a great guy who spent three months here and decided he couldn't take it?"

Waste Management had even thrown in to Mr. LeMay's pay plan stock-appreciation rights that gave him the equivalent of options on one million Sprint shares under certain circumstances, so he wouldn't miss out on any huge increase in his former employer's shares. He apparently relinquishes the big pay package. Waste Management wouldn't comment.

Mr. Miller said he wouldn't be a candidate to fill the chief executive's job at Waste Management permanently, preferring to tend to the ski slopes and model railroad at his home in Sun River, Ore. "That is my future," he said. But during the six weeks-to-six months it takes to find a new leader, he said he'll move forward aggressively.

Mr. Miller said Waste Management planned to hire a chief ethics officer "to ensure we would have a culture that would not tolerate the kinds of things we saw in the past." The company has been the target of environmental and antitrust complaints over the years.

Last year it was ordered to pay $91.5 million to the original developers of the nation's biggest hazardous-waste dump by a federal judge who ruled that the company carried out an elaborate plan to "cheat" the developers out of their share of revenue. Waste Management denied the charges.